Analysis of Structural Changes in Financial Datasets Using the Breakpoint Test and the Markov Switching Model

Phoong, Seuk Wai and Phoong, Seuk Yen and Phoong, Kok Hau (2020) Analysis of Structural Changes in Financial Datasets Using the Breakpoint Test and the Markov Switching Model. Symmetry, 12 (3). p. 401. ISSN 2073-8994, DOI

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The price movements of commodities are determined by changes in the expectations about future economic variables. Crude oil price is non-stationary, highly volatile, and unstructured in nature, which makes it very difficult to predict over short-to-medium time horizons. Some analysts have indicated that the difficulty in forecasting the crude oil price is due to the fact that economic models cannot consistently show evidence of a strong connection between commodities and economic fundamentals, and, as a result, regarded the idea that economic fundamentals help predict price values as random luck. This study aimed to overcome the limitations of the economic models through the detection of structural changes as well as breaks in the data, using a breakpoint test. The Markov switching model is used to address the price patterns that led to a different market state. The results show that there are several changes as well as breaks in the estimated model. Moreover, there is an asymmetric correlation between the crude oil price and the GDP. © 2020 by the authors. Licensee MDPI, Basel, Switzerland.

Item Type: Article
Funders: Fundamental Research Grant Scheme provided by the ministry of education of Malaysia, grant number FRGS/1/2019/STG06/UM/02/9, University of Malaya and Fundamental Research Grant Scheme (grant number: FRGS/1/2019/STG06/UM/02/9) provided by the Ministry of Education of Malaysia
Uncontrolled Keywords: markov switching; breakpoint test; crude oil price; structural change
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Divisions: Faculty of Business and Economics > Dept of Operations and Management Information Systems
Depositing User: Ms. Juhaida Abd Rahim
Date Deposited: 18 Aug 2020 06:51
Last Modified: 18 Aug 2020 06:51

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